Todd Steinberg, head of equities and commodity derivatives, Americas, BNP Paribas
Published: 01 December, 2008
Todd Steinberg
BNP Paribas’ head of equities and commodity derivatives for the Americas explains the machinations involved in the firm’s recent purchase of Bank of America’s equity prime brokerage business. Writer Kathryn Tully.
When BNP Paribas announced that it was buying Bank of America’s equity prime brokerage business in June, which had more than 500 hedge fund clients, Todd Steinberg, the bank’s head of equities and derivatives for the Americas, hit the road. “Prime brokerage is a relationship business,” he says, “so I personally visited the top 75 prime brokerage customers to explain what the merger was about, why they were important to us, what new services we could bring.”
The result was pretty dramatic. In the four months between when the deal was announced on June 9 and the merger closed on September 30, the run rate of the prime brokerage business grew by 30%. When the deal closed, the bank executed share orders for more than half of its brand new prime brokerage clients the very next day and two-thirds of those that used listed options also did options trades that day. “It was way beyond our expectations,” he says.
In fact, Mr Steinberg had been involved in the French bank’s search for a traditional equity prime brokerage business in the US since he joined the firm in September 2005. BNP Paribas already had a synthetic US prime brokerage business, but wanted to offer its leading equity derivatives platform to a wider client base, so started to consider the options three years ago.
Brokerage shopping
It ruled out building a domestic presence from scratch, given the hefty infrastructure commitment and the fact that clients do not switch prime brokers easily, so it started assessing what it could buy. “We’d been looking at prime brokers, large and small, but we couldn’t find anything suitable,” he says, “but when Bank of America’s became available, it was clear from the beginning that it was the perfect fit.”
For a start, the staff there worked in a bank, not a brokerage, and understood a bank environment. Its client base was also complementary. Bank of America’s unit focused mostly on long/short equity; the international prime brokerage unit at BNP Paribas did most of its business in multi-strategy. “We had the multi-strategy clients with $5bn or more of assets under management and it had the $750m to $5bn long/short guys,” says Mr Steinberg. BNP Paribas could also offer international equities execution in 55 countries and a full service derivatives offering to Bank of America’s prime brokerage clients, neither of which they had already.
Plus, Mr Steinberg used to work at Bank of America in equity derivatives. “I knew the prime brokerage business there intimately and I had always been impressed with it. It had always been a profitable, professionally run business, which was very selective about its clients. Having had that internal insight, it was an easy decision.”
There have certainly been some dramatic changes to the competitive landscape in US prime brokerage specifically but also in equities and derivatives generally since the Bank of America deal was sealed. Bank of America has had a change of heart and took on another big prime brokerage business with its acquisition of Merrill Lynch. Barclays Capital is suddenly a big equities and derivatives player after acquiring the Lehman Brothers North American investment banking business. A combined Wachovia and Wells Fargo could also have more clout.
Mr Steinberg says he is not phased by any of that. “Without being specific to any particular institution, when a firm exits a business, it is often very difficult to get back in, and for banks that have gone bankrupt and hedge fund clients that are still trying to get their cash out, I think it is very difficult to rebuild trust.”
Another major issue is that the number of potential hedge fund clients in the market is shrinking, with some closing operations altogether. Other prime brokerage clients will be forced to delever. Yet, Mr Steinberg thinks that will be a bigger problem for larger, established prime brokers that are defending their existing market share.
He argues that those prime brokers that offer relative security are still going to attract new business. He points to the fact that BNP Paribas is now the only AA+ prime broker in the US and that, on the day of the interview, the bank’s five-year credit default swaps were trading at +60 basis points (bps). At that point, Morgan Stanley’s were trading at 875 bps. He thinks that independent broker dealers will continue to have problems when they have to rely on inter-dealer credit as a source of funding. On the other hand, those in universal banks, and, in particular, universal banks that have remained relatively stable throughout the credit crisis, should win the day.
